I'm Picking Up Bad Vibrations

With apologies to the Beach Boys, I have been picking up bad vibrations at a number of reputable financial sites concerning the coming change in the laws affecting credit cards and how the bank and card issuers are responding to this threat. Now, more than ever, keep an eye on your credit cards and any changes in credit limits, fees, or interest rate changes that might occur between now and February when the new law takes effect.

This story begins with the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). Some pretty conservative commentators, such as Mish Sedlock, have dubbed this law the Debt Slavery Act of 2005 because it made bankruptcy, particularly as it affected credit card debt, more difficult than in the past. The banks asked congress for the moon and they got it. The result was a torrent of plastic, issued to all the wrong people, including college students who were too young to buy a beer. The universities, by the way, received kick backs from the card companies for allowing this nonsense on campus.

Check out the parody song, Where Credit is Due, based on the disco hit, Lady Marmalade, from the 1970s. http://versusplus.com/

The card companies encouraged their customers to run up large balances and only make minimum payments. Reach your limit? No problem, we’ll just increase it. Of course they added fees, late penalties, and raised interest rates without warning. In some bankruptcy trials, the judges discovered as much as half the card balance was an accumulation of fees and penalties.

As in all such political problems the pendulum started swinging in the other direction. The Credit Cardholders’ Bill of Rights act has been signed into law and will take effect in February 2010. The banks and credit card companies are already lowering their exposure to loss by lowering credit limits and paying customers to close accounts. They are not only being driven by changes in the law but by fear of the growing unemployment rates. From what I understand, banks have modeled their credit card business to handle up to 10% unemployment. If the unemployment rate exceeds 10% by any significant amount, then the banks will need more federal bailout money. They know that unemployed people, even people who have never misused their card in the past will use that credit limit as a lifeline if they loose their job. Their customer will make the minimum payment for as long as possible, but they day of reckoning will come and the card company will loose.

In a recent survey 1/3 of the responded noted that their credit card companies have made one or more of the following changes to their accounts.

19% said the card’s interest rose
14% said fees increased
12% said their minimum payment increased
9% said their rewards program was cut back.

There is more bad news. In the course of my studies, I have discovered that some of my friends have played sophisticated games with 0% interest offers. They move some or all of their balances from card to card, avoiding interest charges while postponing payment. This practice is coming to an end. Many of the majors have raised the fee for transferring a balance to a different card from zero to 4%. Without double checking the number, I believe J.P. Morgan just raised their charge to 5%.

In the past, the ideal credit card customer carried a balance from month to month and made something more than the required minimum charge. These people, much to their shock, are discovering that their credit limits are being lowered by the banks. This not only lowers the bank’s exposure to loss but it also lowers the customer’s FICO score. One of the most important factors in the calculation of a FICO score is the balance to limit ratio. That ratio needs to stay under 1/3. Example: If your credit card has a $15,000 limit, keep your balance under $5,000. Of course when the bank lowers your credit limit that act can kick your balance to limit ratio over 1/3. When this happens, the bank can and will increase the interest rate on your card due to the drop in the FICO score that their unilateral action triggered.

Adam Levin, a former director of the New Jersey Department of Consumer Affairs notes, “It’s all about fee generation.” The credit card companies are trying to find as many little ways to increase their profitability as possible. An example of new fees instituted by one card are foreign service transaction fees charged for buying a ticket on a foreign owned airline, even though the transaction was denominated in dollars. The bottom line is keep a close eye on that plastic between now and next February. We might be in for some nasty surprises.

Here are the links to two of the most recent articles I have read on this subject.

http://finance.yahoo.com/banking-budgeting/article/107232/credit-card-companies-who-qualifies-now.html?mod=bb-creditcards

http://finance.yahoo.com/expert/article/moneyhappy/172642

I am not exactly sure what this passage has to do with this post but it has been on my heart lately. It speaks of kingly generosity and the financial cost of discipleship, good subjects for any season

Second Samuel 24

[16] And when the angel stretched out his hand upon Jerusalem to destroy it, the LORD repented him of the evil, and said to the angel that destroyed the people, It is enough: stay now thine hand. And the angel of the LORD was by the threshingplace of Araunah the Jebusite.
[17] And David spake unto the LORD when he saw the angel that smote the people, and said, Lo, I have sinned, and I have done wickedly: but these sheep, what have they done? let thine hand, I pray thee, be against me, and against my father's house.
[18] And Gad came that day to David, and said unto him, Go up, rear an altar unto the LORD in the threshingfloor of Araunah the Jebusite.
[19] And David, according to the saying of Gad, went up as the LORD commanded.
[20] And Araunah looked, and saw the king and his servants coming on toward him: and Araunah went out, and bowed himself before the king on his face upon the ground.
[21] And Araunah said, Wherefore is my lord the king come to his servant? And David said, To buy the threshingfloor of thee, to build an altar unto the LORD, that the plague may be stayed from the people.
[22] And Araunah said unto David, Let my lord the king take and offer up what seemeth good unto him: behold, here be oxen for burnt sacrifice, and threshing instruments and other instruments of the oxen for wood.
[23] All these things did Araunah, as a king, give unto the king. And Araunah said unto the king, The LORD thy God accept thee.
[24] And the king said unto Araunah, Nay; but I will surely buy it of thee at a price: neither will I offer burnt offerings unto the LORD my God of that which doth cost me nothing. So David bought the threshingfloor and the oxen for fifty shekels of silver.
[25] And David built there an altar unto the LORD, and offered burnt offerings and peace offerings. So the LORD was intreated for the land, and the plague was stayed from Israel.